Simon Johnson in Economix:

A debate has broken out over whether the country’s largest banks should be allowed to own physical commodities, including the facilities used to transport, store and process these goods. This may be the strangest debate we have had about banking in the United States in the last five years, because the answer is completely obvious: it is a new and very bad idea to allow big banks to also dominate any dimension of the commodities business. It is also not sustainable politically, and the big banks will soon have to divest themselves of these activities.

The headlines are attention-grabbing and the investigations are substantive. Goldman Sachs is reported to be slow-walking aluminum out of warehouses that it controls. JPMorgan Chase is settling accusations that it manipulated energy prices and may also face pressure to get out of the metals and oil business more broadly. Big companies that buy aluminum, like MillerCoors, are not happy with the way banks have been operating, and these nonfinancial companies have an important political voice also. The political changes afoot may also affect Morgan Stanley and Barclays, which both have significant involvement in commodities.

Senator Sherrod Brown, Democrat of Ohio and a leader among those who want a safer and better run financial system, asked recently, “What do we want our banks to do, make small-business loans or refine and transport oil? Issue mortgages or corner the metals market?”

… One major and legitimate concern expressed by some of Senator Brown’s predecessors … was that providing bankers with a government backstop would enable some of them … to become even more powerful…

The ultimate quid pro quo [when the Federal Reserve System was created in 1913] was, not unreasonably, that while the newly created Fed would act as a lender of last resort to banks, it would also help to constrain the activities in which these banks could engage. The consensus was that the United States needed a stable banking system for intermediation (from savers to borrowers) and to run the payments system. Outside of that, a freer market – without downside protection provided by the Fed – was the choice.

… In part, the restrictions on banks’ activities were about limiting risk, but these constraints were also very much about commercial fairness. The Fed was not offering any kind of backstop to manufacturing or transportation companies, and if banks were to enter those activities, they would presumably have an unfair advantage.

In recent decades, unfortunately, this picture changed drastically. In part, firms known as “investment banks” (which were not banks in a legal sense) were allowed to become more like regular Federal Reserve System banks, becoming larger and financing themselves with short-term liabilities…

When you allow any companies both cheap government-backed financing and carte blanche to take over other sectors, what would you expect to happen? And if you allow any kind of unfair market power to develop, surely it would be a shock if this did not result in higher prices or less good service – or even some kind of manipulation.

It’s worth reading all of Johnson’s piece.  See also this one in the Wall Street Journal and this one in the American Prospect for background.   The Prospect article sums it up succinctly and makes an important point:

The Fed loosened rules to allow banks to buy commodities, driving up everyday prices for consumers. Who the next chair is matters if these kinds of practices are ever to be stopped.

And that’s a good reason to favor Yellen over Summers I think.